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Shareholders’ Rights & Shareholder Activism 2019

1.1 Types of Company

The principal statute governing the formation and operation of a BVI business company is the Business Companies Act 2004, as amended (the ‘BC Act’). The BC Act regulates the incorporation of all types of BVI companies, including those limited by shares, those limited by guarantee, unlimited liability companies, restricted purposes companies and segregated portfolio companies. However, the most common form of company in the BVI is a company with limited liability authorised to issue shares.

There are no qualification criteria under BVI law that impose restrictions on which shareholders may invest in a BVI business company. However, any beneficial owner owning, directly or indirectly, 10% or more of the voting shares of a BVI business company will need to satisfy the registered agent’s ‘know your client’ requirements.

1.2 Type or Class of Shares

There is substantial flexibility as regards the types or classes of shares that a BVI business company may issue. A business company may issue shares with or without par value. The most common type of shares are ordinary shares. The BC Act does not stipulate separate share classes or shareholders’ rights attaching to particular classes of shares.

A business company may issue shares:

  • with or without voting rights or with different voting rights;
  • with no rights or preferential rights to distributions;
  • with special, limited or conditional rights;
  • which are redeemable; or
  • with rights to participate only in certain assets of the company.

The rights are set out in the business company’s memorandum of association (‘Memorandum’).

1.3 Primary Sources of Law and Regulation

The BC Act is the primary statute applicable to shareholders’ rights in the BVI. In addition, the BVI courts will apply common law principles in interpreting matters relating to the exercise and enforcement of shareholders’ rights in respect of a business company.

1.4 Main Shareholders’ Rights

The shares issued by a business company typically confer on the holder:

  • the right to one vote at a meeting of the members of the company or on any resolution of the members of the company;
  • the right to an equal share in any dividend paid in accordance with the BC Act; and
  • the right to an equal share in the distribution of the surplus assets of the company.

Under the BC Act it is possible for the Memorandum to negate, modify or add to the above fundamental rights. In theory, the company could issue shares which carry none of the fundamental share rights. However, in doing so it would create an unattractive scenario in which no business company shareholders are entitled to economic or voting rights. The better view is that whilst these fundamental shareholder rights may be varied, at least some shares would need to carry the fundamental rights, even if the rights are carried by shares of different classes.

Shareholder approval is generally required to vary a class right, as set out in the Memorandum or articles of association (‘Articles’). Without the requisite shareholder approval, a variation of class right is ineffective. Class rights are generally considered to be the right to vote, the right to receive dividends and the right to receive payments on a winding up, although the case law is not clear as to precisely what constitutes a class right. Furthermore, the courts have tended to apply a narrow interpretation as to what constitutes a variation of a share right, particularly in relation to the determination of when a variation of a class right attached to one class of shares also has the effect of varying a class right attached to another class of shares.

A variation of shareholder rights would require an amendment to the Memorandum and Articles in order to be effective. The BC Act provides that:

  • the Memorandum and Articles may be amended by a shareholders’ resolution, although it is possible to provide in the Memorandum that certain provisions of the Memorandum or Articles may not be amended;
  • that the required majority to pass a resolution amending all or specified provisions of the Memorandum or Articles is greater than the default simple majority; and
  • that any amendments to the Memorandum or Articles will only be effective on the satisfaction of specified conditions.

Therefore, it is theoretically possible to state in the Memorandum or Articles that certain shareholder rights may not be amended, although it would be unusual to introduce such a degree of inflexibility in the business company’s constitutional documents. It would be more typical to set the required majority for the shareholder approval at a threshold higher than a simple majority.

The BC Act also provides that the directors of a business company may amend the Memorandum or Articles, however there are limitations on the ability of the directors to do so. In particular, the directors are not permitted to restrict the shareholders’ power to amend the Memorandum or Articles, or to change the majority required for a shareholders’ resolution to amend the Memorandum or Articles. In addition, if the Memorandum and Articles cannot be amended by the shareholders (for example, by express provision in the Memorandum or Articles) then the directors will not have the power to amend the Memorandum or Articles.

The shareholders of a business company may enter into shareholders’ agreements and the BVI courts will generally seek to respect the commercial arrangements agreed by parties to the shareholders’ agreement. However, any such shareholders’ agreement does not operate to amend or modify the shareholders’ rights as set out in the business company’s Memorandum or Articles. The rights of the shareholders will be governed by the Memorandum and the Articles. The effect of the shareholders’ agreement is that the parties to the shareholders’ agreement may be stopped from enforcing the particular shareholder rights in that respect.

On occasion, one sees shareholders’ agreements incorporated by reference into the Memorandum and Articles. Whilst the position is not free from doubt, it is our view that this reference is not effective and that the shareholders’ agreement would not be incorporated in the Memorandum and/or Articles as a consequence of such reference. Rather, to the extent that the shareholders’ agreement deals with matters that are governed by the Memorandum or Articles, then the provisions need to be expressly set out in the Memorandum and Articles.

 

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Robert J.D. Briant
Partner, Head of BVI Corporate

British Virgin Islands   +1 284 852 1100


Nicholas Kuria
Counsel

British Virgin Islands   +1 284 852 1129


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